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How to benefit from price action trading strategies

28 Nov 2022 0 COMMENT

Introduction

Day trading may be about an adrenalin rush. However, there must always be a plan. Active traders adopt various strategies to take positions on assets or stocks that can generate returns during a trading day. The technical analysis of price charts offers several indicators that day traders use to determine trading positions. Price action trading is different. It does not rely on technical analysis. Instead, it focuses on understanding the price movements of an underlying stock or asset. The idea is to identify the entry and exit positions. 

Defining price action trading strategy

Price action in trading studies the performance of a security, commodity, index, or currency to predict its movement in the future. Traders take a long position if their price action analysis suggests a price rise and short the asset if it indicates a fall in price.

Understanding price action trading requires analysis of patterns to identify key indicators that can impact your investments. Traders can use several price action methods to predict market movements and make short-term gains.

Top 7 price action trading strategies

Trend trading

Most traders make trading decisions based on trends in price. They use different methods to track and follow trends in market prices. The trading strategy is excellent for newbies as it allows them to learn from experienced traders. To benefit from the trend trading strategy, you can opt for a short position during a downtrend and an extended position if there is an uptrend.

Pin bar

This trading strategy is also called the candlestick strategy because of its appearance. A pin bar pattern looks similar to a candle with a long wick. The pin bar signals the rejection or reversal of a particular price. The wick indicates the price range the investors did not accept. The assumption is that the price will move opposite the wick, and traders will determine whether a long or short position in the market will be profitable. 

Inside bar

The inside bar trading strategy involves two bars. The outer bar is more significant than the inner bar. The inner bar lies within the low and high range of the outer bar. The formation of the inside bar occurs during market consolidation. But its formation can also indicate a turning point in the market. Seasoned traders spot the trend and determine if the inside bar signals a turning point or a consolidation.

Trend after a retracement entry

In this price action trading strategy, traders simply follow the existing trend. If the price is on a downtrend, with the consistent creation of lower highs, traders can look at short-selling. Similarly, if prices witness an uptrend, traders can buy in.

Trend after a breakout entry

It is a breakout if the market moves outside the resistance or defined support line. This trend maps any significant market movements assuming that a price spike will lead to a retracement.

Traders can study the signals to take a short position if the stock is trending below the support line or a long position if it breaks above the support line and trends upwards.

Head and shoulders reversal trade

Market volatility is common with many ups and downs. A head and shoulders pattern represents market movements and appears like a head and shoulders shape on charts. The prices in the market rise, fall, rise even higher and rise to a lower high before dropping modestly.

This price action trading strategy is one of the most popular since it is comparatively easier to pick an entry point and set a stop loss to benefit from a temporary peak.

The sequence of highs and lows

Price action trading is primarily a strategy of highs and lows. Traders follow the pattern of highs and lows to spot emerging trends in the market.

For instance, if a commodity’s price trades at higher highs and higher lows, it indicates an upward trend. It signals a downward trend if the price trades at lower highs and lows. Traders can use this information to pick an entry point at the lower end of an upward trend and set a stop loss before the preceding higher low.

Final thoughts

The price action trading strategy uses price movements to determine potential movements in the market. Traders adopting this strategy try to spot trends using actual prices, unlike technical analysis, which focuses on moving averages. One can deploy many price action trading strategies to identify earning opportunities. Remember to practice the strategies before adoption to make wise trading decisions.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.